The said bill is creating confusion and angst amongst many a trustee as the bill aims to introduce a number of highly prejudicial and detrimental amendments that may affect lenders to trusts and trusts directly if the amendments become law.
In the first instance the Draft Taxation Laws Amendment Bill document is a draft and is subject to public commentary and possibly may be reviewed before being passed in due course, if at all.
The salient point of this article that deals with the bill and relates specifically to trusts are contained in the proposed insertion into the Income Tax Act of a new section 7 (C).
The new section is intended to curb the transfer of assets into trust structures through the means of interest free loans or low interest loans.
In essence from the 1st of March 2017 any loans that have been made by an individual or a connected person to that individual to a trust that does not attract interest or attracts interest at a lower rate than the official rate will trigger income tax in the hands of the lender.
Further, the interest exemption available to individuals in the Income Tax Act does not apply to such a transaction and if the income tax that results from such an arrangement is not received by the individual from the trust within 3 years when same is due, such amount will be deemed a donation and will attract donations tax at a rate of 20%.
The interest payable on the loan can only be tax deductible by the trust if the interest qualifies under the general deduction formula and is levied at market rates.
The annual donations tax-free allowance of R100 000.00 per month is no longer available to individuals to reduce these affected loans.
Avoid rushing into restructuring the trust structures until the law has been settled. Get specialist advice.
The draft bill is in complete conflict with the proposals that were put forward in the first Davis Tax Committee report that stated that interest free loans to trusts were in order.
Confusion reigns as individuals are being shoved from pillar to post with the different positions that are being postulated!
The proposed amendments are intended to curb the supposed erosion of the tax base through the transfer of assets via interest free loans trusts is nonsensical as the number of individuals supposedly achieving these tax breaks are miniscule.
There are many other means of raising taxes but this is a complex and unjust attempt.
The above notwithstanding it is critical to consider the reasons for having established the structures in the first instance, namely:
- Asset protection.
- Succession planning.
- Avoiding hardships such as estate freezing.
- Protecting minors and beneficiaries that are not financially astute or savvy.
- Transfer of assets to future generations
We wait with baited breath on the outcome of these proposed changes. We have feverishly been at work on a number of solutions on how to minimise or circumvent the impact of these changes if they are ever implemented.
In closing, the more things change the more they stay the same.